Rate cut could tempt some into more debt

If the Federal Reserve's recent cut in interest rates makes it less expensive and easier for people to obtain loans, it would be bad news for Yusupha Touray.

By his estimate, Long Beach, Calif., resident Touray, 27, owes about $93,000 in credit card, phone, utility and hospital bills. "When my bills come, I know I don't have any money to pay them," he said. "So I don't bother anymore."

Nevertheless, Touray said he receives pitches from credit card issuers in the mail almost every day. If those pitches become a smidge more attractive because of lower interest rates, he said he just might be tempted to go even deeper in the hole.

"It's amazing," Touray said. "You keep saying no, and they just keep making more offers."

The Fed said its decision to cut short-term interest rates by half a percentage point was intended to ease the credit crunch in the housing market. That's another way of saying the main beneficiaries are heavyweight financial institutions that were slammed by investments in subprime loans.

For consumers, the Fed's action could mean lower mortgages for some, but also lower rates on credit cards and auto loans. And for those who aren't careful, it could result in even more debt for a country that's drowning in consumer debt.

"There's definitely a danger that people will be tempted to take out too much credit," said Linda Sherry, a spokeswoman for Consumer Action in Washington, D.C. "They'll use it for things they want rather than things they need."

Because consumer spending accounts for about two-thirds of the U.S. economy, that's not necessarily a bad thing. But unless managed prudently, it can spell trouble for many households.

According to Fed statistics released recently, U.S. consumers are carrying a record $2.456 trillion in debt (not including mortgages).

The amount of revolving credit, such as credit cards, carried by consumers rose in July at an annual rate of 6.6 percent, or by $5 billion--the third straight month of significant gains. Revolving credit was up 6.4 percent in June and a whopping 10.9 percent in May, the Fed reported.

Non-revolving credit, which includes auto loans, registered a 1.9 percent gain in July. That compares with 5.6 percent in June and 5.5 percent in May.

With lower interest rates, it's possible that revolving and non-revolving credit will spike higher. And with it, consumers' debt load.

Azim, 45, said that with the economy the way it is, she's seeing more people using plastic instead of cash to buy baubles.

"People love the gold," she said with a shrug. "So they use their credit."

Frank Banueloz, 44, works as a legal analyst for the California Department of Justice. He said he tries to manage his finances wisely. Even so, he and his wife are carrying about $10,000 in credit card debt.

"I'm trying to use cash more instead of credit," he said. "It's hard to do."

The flip side of consumers' record high debt level is a pathetically meager personal savings rate. People are spending every last penny they earned, and often are dipping into savings, stocks or other resources to spend just a little bit more. The savings rate crept up to 0.7 percent in July from 0.5 percent a month earlier.

Meantime, the average family was spending 14.3 percent of disposable income to service its debt load during the first three months of the year, according to the liberal-minded Center for American Progress. That's up from 13 percent in the first quarter of 2001.

Toluca Lake, Calif., resident Daryl Sanchez, 40, is typical of many middle-class people. He's well-educated, works hard, yet still struggles to ease his debt burden. Among student loans, credit cards and other bills, Sanchez said he's more than $50,000 in the hole.

"Everything's so expensive," he said. "Just the basics, like gas. It's so easy to get into debt."

Sanchez said he's trying hard to reduce his debt. "It's challenging," he said. "There's only a finite amount of income coming in."

The experts advise consumers to limit themselves to one or two credit cards, and to pay off the balance each month. Resist the temptation to make minimum payments, which can trap you in an endless cycle of debt.

And throw away all those solicitations from card issuers spilling into the mailbox, no matter how attractive the terms appear, especially with lower interest rates.

John Barnes, 76, works as a construction inspector. Shortly after the Fed slashed rates, Barnes was watching as a power shovel dug a trench in a downtown Los Angeles street.

Credit card debt? Nah. He said he doesn't even carry plastic.

"If I can't pay for it, I don't get it," Barnes said.

Such simple advice. And it can make all the difference.

David Lazarus is a columnist for the Los Angeles Times, a Tribune Co. newspaper.